Construction feeling "capacity squeeze" says Turner & Townsend

Construction is continuing to feel the aftershocks of the pandemic on top of global inflationary pressures, according to Turner & Townsend's Summer 2023 UK Market Intelligence report. 

The report calls for stronger project controls and upfront programme planning to combat a sector-wide capacity crunch, as cooling demand, high insolvencies, risk-averse contractors, and loss of market confidence have the potential to create further pressures for the industry.

The global professional services consultancy outlines slowing new orders, low new work construction output, and persistently high labour and material costs as causes for concern amongst the UK construction industry, when set against a backdrop of ongoing inflation and supply chain contractions.

Martin Sudweeks, UK managing director of cost management at Turner & Townsend, said: “Construction is continuing to feel the aftershocks of the pandemic and global inflationary pressures, but the current outlook goes beyond that – and government and industry need to face up to the structural problems our sector is facing.  

"The UK wants higher growth, and a greener, more productive economy.  

"Construction is at the heart of achieving that. But it will remain hard to achieve while we face underinvestment in skills and capacity, and a lack of clarity on a future pipeline of committed projects."

He added for firms in the eye of the storm, putting the right procurement and digital strategies in place will be essential to mitigating the risks.  

"Skills gaps must be identified early, and the availability of key personnel locked in," he said.  

"Contractors’ financial status must be rigorously evaluated, along with better management of data and real-time reporting to continually assess the progress and performance of projects.  

"Our industry faces a very difficult climate, but as the last few years have shown, we are resilient, and our ability to innovate and creatively rethink our ways of working will help us emerge ever stronger.” 

In response to the current conditions, Turner & Townsend has slightly increased its tender price inflation forecasts for real estate, up to 3.7% and 2.7% in 2024.  

The predictions for infrastructure tender price inflation in 2023 are unchanged from the Spring forecasts, at 5.5%.

However, with lower private investment than pre-pandemic levels and the recent resequencing of major projects by the Government in the mini-budget, this could mean a cooling effect longer term, and so the 2024 estimation has been revised downwards to 4.5%.

These forecasts are driven by a series of major factors.  

The total number of construction insolvencies rose by 9.7% in the year to Q1 2023, with falling construction output combining with increased input costs to tighten contractor margins. 

The downward trend in output is expected to continue through 2023, with a predicted 6.4% fall in part due to declining new housing starts in both the private and public sectors.  

At the same time, the price of materials has increased by 4.7% – 42.7% above pre-pandemic levels. 

Further impact also stems from the scarcity of skilled workers and insufficient labour pool - leading to delays and increased costs.  

Total construction employment in Q1 2023 contracted by 1.9% on the previous quarter, with vacancies still at a historically high rate.  

The new report acknowledges the headwinds facing construction firms and the entire supply chain. 

Turner & Townsend has set out its advice to mitigate the impacts mainly of flatlining client demand and reduced industry capacity.  

The business is calling on clients to review their procurement strategies, take greater control of the design stages, adopt more collaborative contracting frameworks, and identify and share potential risks.

Read the report.

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